(Editor’s Note. Though much of our consulting activity used to focus on ways to increase cost recovery, the tougher competitive government market has changed some of our efforts to help clients lower their price proposals. One of the useful topics we intend to probe in the DIGEST is how to price your proposals. In a prior issue of the GCA REPORT (Vol.3, No.4) we identified several prevalent pricing tactics firms choose to lower their bid prices. Since reader response was highly favorable, we have chosen to basically duplicate that article that highlighted more common pricing tactics your competitors may be using. We have incorporated some of the ideas of Brian Fischer in the May 1997issue of Contract Management.)

Some of the tactics we discuss below represent real overall cost savings to contractors while others merely shift costs away from the proposed contract being sought.

1. Shift average direct rates to lower end of the spectrum. Rather than using an average rate for a given labor category (or even the higher end citing the need for more years of experience, for example), price rates at the lower end with the intention of hiring new employees or using lower paid employees on the contract.

2. Use and bid uncompensated overtime. Lower the hourly rate by dividing the yearly or monthly salary by a number larger than the normal 40 hour work week with the intention of having salaried employees working more hours. Remember that protests are common when only some offerors bid uncompensated overtime but they have rarely been successful when the uncompensated overtime is not excessive.

3. Propose a low or negative escalation rate. For out years, most current labor rates and other costs are multiplied by an escalation factor supplied by such firms as DRI McGraw Hill. In price sensitive competitions, proposing a low or negative rate can be highly favored by selection personnel. Common ways of achieving these low escalation rates include (a) promoting employees over the contract period from lower to higher paid categories while hiring new employees at the floor level (b) proposing as a base rate an estimated average rate over the period of performance or (c) freezing wages.

4. Hire "temporary" or "variable" employees. Increasingly, many companies’ new hires are individuals who are paid only for direct billing time or who do not receive the fringe benefits current employees receive (see our last issue on ways to treat fringe benefit expenses for this class of employees). Real cost saving are achieved not only by lower costs but also reduction of disguised idle time (often charged to "marketing" or "administration").

5. Reclassify certain indirect functions as direct. Certain functions like contract and subcontract administration, purchasing, materials inspection, etc. can be identifiable with specific contracts rather than included in an indirect cost pool spread over all contracts. Many of these costs can be charged to other contracts and excluded from overhead.

6. Change the G&A base. If, for example, government contracts are likely to have a higher subcontract or material component compared to other contracts, you may want to shift from a total cost input base to a value added base (e.g. calculating and applying G&A costs to labor and overhead only).

7. Exclude costs. This might be desirable if winning a government contract can substantially benefit commercial work or reimbursement at less than cost might help retain highly skilled labor during a lull. Alternatively, you may want to consider a bottom line reduction from the indirect cost pool in the form of a "customer concession". This one time concession would not be considered a precedent on other contracts but care should be taken to make sure other contracts do not absorb these deleted costs.

8. Reduce proposed profit/fee. Propose lower fees or eliminate fees on certain type of costs (e.g. subcontractors).

9. Create a new business unit. A separate business unit (e.g. producing only for the government or one product or service) could justify a disproportionate allocation of home office expenses such as marketing, research and development, etc. Also, a new unit could be staffed with personnel having lower direct rates and fringe benefits without impacting other business units (see our related article on Joint Ventures and SBUs in this issue).

10. Aggressively reduce indirect cost rates. Though it can be risky, assume a larger business base (e.g. denominator) to spread indirect costs over. This is particularly effective if cost reduction measures or aggressive pricing is expected to generate more business.

11. Find outsourcing opportunities. In addition to the cost savings benefits of shifting less critical functions to more efficient subcontractors, a lower subcontract rate could be developed and applied to outsourcing costs. This would shift some indirect costs out of overhead or G&A and still achieve a lower cost than applying the old, higher indirect cost rates to the direct labor replaced by subcontractors.

12. Base pricing on aggressive performance improvement estimates. Instead of using normal estimates of performance (e.g. history), price the proposal according to aggressive estimates of improvements being planned. You can use these prices as a project budget and, if you wish, develop compensation bonuses that if attained, can be included in fringe benefits.

Some of these measures will create changes to current accounting practices. If your firm is covered by cost accounting standards some form of cost impact analysis on your other contracts may be required. If not CAS covered, there is considerably more leeway in making these changes. Careful planning and communication with government auditors and your CO will likely avoid problems associated with these accounting and pricing actions while helping your organization remain competitive in today’s government marketplace.

{TAG_FORM_TITLE}